Financial Education Isn't Consumer Protection

posted by Adam Levitin

The CFPB is out with its Strategic Plan for FY 2018-2022, also known (without any apparent irony) as The Five Year Plan. Lots to chew on in this doozy, starting with this:

If there is one way to summarize the strategic changes occurring at the Bureau, it is this: we have committed to fulfill the Bureau’s statutory responsibilities, but go no further. Indeed, this should be an ironclad promise for any federal agency; pushing the envelope in pursuit of other objectives ignores the will of the American people, as established in law by their representatives in Congress and the White House. Pushing the envelope also risks trampling upon the liberties of our citizens, or interfering with the sovereignty or autonomy of the states or Indian tribes.

I've written about envelope pushing and Mick-Mulvaney-Think previously, but there's two new things here. First there's the claim that going beyond the Bureau's statutory responsibilities violates the will of Congress. (Note the unusual addition of "the White House" to the formulation.) Narrowly that's uncontroversial, but the way Mulvaney-Think approaches the Bureau's statutory responsibilities, if there isn't a statutory clearly and directly prohibiting something, then there's no prohibition. Standards-based regulation is gone, even if that is exactly what Congress (and the White House when the bill was signed into law) demanded.

Second, there is a curious solicitousness for the rights of states and Indian tribes. The CFPB has never previously been accused of trampling the rights of states, but the inclusion of states is all the more confusing given the Bureau's newfound commitment to protecting the sovereignty of Indian tribes. The only relevance of Indian tribes to the CFPB is that a few of them partner with "fintechs" in rent-a-tribe schemes to avoid state regulation, particularly state usury laws. It would seem that upholding state sovereignty and rights would require cracking down on rent-a-tribe schemes; the idea that a tribe has immunity for commercial activities extending outside of tribal lands is clearly wrong--were it so all of federal law could be subverted. It looks like someone forgot to remove the "states rights" talking point from the usual GOP talking points deck because someone didn't realize that it conflicts with the new tribal rights talking point. Oops.

But let's turn the the actual plan itself, not just the opening rhetoric. I'm only going to focus here on item number 1: more financial education. This might qualify as Worst. Consumer. Protection. Idea. Ever.

Now wait, Levitin, what are you possibly talking about? You're going to write a screed against "education"? Isn't that an admission against interest from a professor? Who could possibly oppose eduction? And anyhow, didn't Congress, in its in its deep and infinite wisdom required that the CFPB have a financial education mission and mandate a Consumer Education and Engagement Office in the Bureau?

I've got nothing against education generally. But regulators should pursue strategies that are calibrated to the problems that actual exist in the markets they regulate and likely to fix those problems. Viewed this way, financial education is largely worthless for most (but not all) consumer finance issues. In most cases it's going to be as helpful as one of Gwyneth Paltrow's coffee enemas (a/k/a 21st century Carbolic Smoke Balls). Here's why:

First, financial literacy only matters when there is a possibility of consumer choice in a market. That's not the case with several key consumer financial product markets: debt collection, loan servicing, and credit reporting. The consumer doesn't pick the service provider in these markets. Critically these are the markets with the most consumer complaints filed with the CFPB. So

Second, given the poor state of American numeracy, the idea that we're going to achieve financial literacy of any material sort is silly. When folks can't do simply arithmetic operations, it doesn't matter much if they understand theoretically what compound interest means.

Third, some things are in fact complicated and hard, so that even very numerate, very financially literate folk don't intuitively understand them. Try amortization schedules: can you explain the Rule of 78s? Do you really think that you can teach people to understand it readily? (And yes, it still applies to some auto loan transactions.) I've taken classes of very bright first year law students through credit cardholder agreements and asked them to explain what the agreements mean. They can't. That should given anyone who preaches financial literacy and education some pause.

Fourth, even if consumers were financially literate, they regularly encounter transactional settings that discourage careful consideration of options. Examples here are when the consumer is told the terms of the deal over the phone or when the consumer goes to a car deal and is given the hard sell in the F&I office after having sunk a few hours into picking a car, negotiating a price and a trade in, etc. Likewise, for a small dollar transaction, how much time is a consumer rationally going to sink into evaluating and comparing options?

Fifth, businesses have incentives to interfere with consumer understanding--if the consumer perceives a price as being lower than it is, the consumer will overconsume, which is what the business wants--more sales. Don't think businesses do this? Look at the CFPB's own complaints. CFPB & FDIC entered into a consent order with Discover Bank that alleged, among other things, that Discover sales reps started speaking real fast when it came time to disclose material terms. That's a pretty crass way of doing things, but it doesn't seem so different than using fine print or a hard-to-read font or burying information in long, prolix disclosures.

Sixth, literacy doesn't help with fraud or deception. Nor does it help when a financial institution doesn't act in good faith once a deal has been made. Those are the situations that UDAAP is supposed to police. Those are what virtually every CFPB enforcement action has been about. Yet that seems to be precisely what Mick Mulvaney says the CFPB won't be doing--UDAAP actions are entirely discretionary--the CFPB isn't required to bring any UDAAP enforcement actions or undertake any UDAAP rule makings, and "unfair, "deceptive," and "abusive" are, to some degree, in the eye of the beholder. The Mick Mulvaney-administered CFPB seems to have a declared policy of extreme myopia--see no evil, hear no evil, but a healthy does of financial literacy enemas.

Obviously there are some places where some greater financial literacy helps. It helps for a consumer to understand the risks inherent with particular products. What happens if I can't refinance this mortgage when the rate resets? What happens if I co-sign a loan and the other co-signor dies? Etc. But I don't think this is what the CFPB means in terms of financial literacy.

Still, let me end with a positive recommendation. If the CFPB wants to do one simple thing that will help American consumers, it will engage in a very proactive advertising campaign to let people know that they should get pre-approved for a car loan before going to look for a car at a dealership. If you go into the dealership without an alternative offer, you've just walked into a monopoly market, where the dealer is not incentivized to find you the cheapest loan term. Some folks are smart enough to get offers from third-party lenders before they go shopping for a car. Everyone should or at least everyone should know that they should. If the CFPB takes financial literacy and education seriously, this is a very concrete, easy step to take.

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